• Income drawdown leaves your pension invested and allows you to take a portion of the pension pot each year as an income
• Depending on the age you are when you die, the unused pension pot can be inherited tax-free
• With income drawdown you are not guaranteed an income for life, and if you empty your pension pot too soon, you could face later retirement with a much reduced income
When you retire, you don't have to go down the route of purchasing an annuity.
An alternative is to leave your pension invested and take a portion of the pension pot each year as an income, hence the phrase 'income drawdown'. The pension changes that came into effect in April 2015 make it easier than ever to take an income from your fund.
Income drawdown – which you may also hear referred to as an unsecured pension – has the advantage of possibly leaving your family some legacy when you die as your pension pot will pass on to your family according to your wishes. Depending on the age you are when you die, the unused pension pot you pass on may be tax-free: if you are under 75, your dependents will receive the pension fund as a tax-free payment. If you are 75 or older, the payment is taxable at the beneficiary's income tax rate.
Income drawdown is not guaranteed for life: you only have an income for as long as you have a pension pot, so if you empty your pot, you will face later retirement with a much reduced income.
In addition, because your pension remains invested, the value of it could go down, at a time when you're probably not in a position to replace this loss with new money.
“If you are considering income drawdown it is better to overestimate your life expectancy when deciding how much to draw each year to ensure you don’t run out of money from your pension pot.”
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.